Distributed ledger technologies (DLTs) and blockchain are two new developments that the financial industry is closely watching. Research from SWIFT and accenture has highlighted why this is creating so much buzz and how to bring it into the fray

Described as a movement that has 'captivated the industry', DLTs are said to have the potential to bring a huge amount of opportunity and efficiency to the financial sector.

According to the report, the benefits to DLT implementation include:

• Information propagation: An efficient way of keeping a full network up to date with the latest information;
• Full traceability: Information can be traced throughout the entire process chain and ledger information would be immutable;
• Simplified reconciliation: Local access to complete and verified data which could ease reconciliation processes;
• Trusted disseminated system: Participants are able to trust the authenticity of the data on the ledger without recourse to a central body. Transactions are digitally signed and its integrity in guaranteed by a network of communicating nodes; and
• High resiliency: Operates seamlessly and removes dependency on a central structure for service availability.

However, as DLTs emerged from the consumer-to-consumer (C2C) market, they do not have the necessary requirements for banking usage. The report stated: "Evidently, the wider financial industry has an altogether different set of requirements than the application of individual consumers seeking alternative methods of value transfer."

There are eight areas that the report highlights in which blockchain and DLTs need to improve in order to be successful on a larger scale.

Strong governance

Cryptocurrencies currently do not provide enough trust, transparency or accountability, certainly not enough for financial services. The report stated: "The role of centralised governance versus open-source models needs to investigated further, especially in the context of regulatory requirements and reporting, in order to ascertain the appropriate level of governance required."

Data controls

Data confidentiality is crucial with any solution supported by the financial industry and firm controls must be placed on DLTs to ensure that only authorised parties have exclusive access to the data relevant to them.

As a possible solution, the report explained: "Work is required to better define what kind of data must reside in the ledger and should be distributed between participants. Alternative models should be investigated which are capable of distributing data sets only between the participants of a given transaction, either through peer-to-peer communication or another solution capable of truly guaranteeing privacy."

Compliance with regulatory requirements

Industry participants will need to clearly understand how DLTs will impact their ability to comply with regulatory reporting and audit requirements. Another area to consider will be the level of data to be reported versus the current mandates. It will also be crucial to figure out how to deliver the appropriate amounts of data detail without violating privacy laws.

Standardisation

There is a lack of standardisation at all levels of the DLT process and this has led to the various distributed ledgers unable to interoperate. In addition, the ledgers are not aligned to market standards and practices.

Identity framework

According to the report, 'a very strong identity framework is required to guarantee the identity of the parties involved in a particular business service, and to support non-repudiation of activities performed by the various participants. This is essential to provide trust in the system, ensure accountability and support any claims process. It is also a pre-requisite to be able to perform Know-Your-Customer and compliance checks'.

Security and cyber defence

With the ever-present threat of cyber-crime surrounding the whole issue of blockchain, and online payments in general, any DLT solution must be designed with the assumption that it will be subject to cyber-attacks and must be able to protect itself. Moreover, with attacks growing in number and strength, the defences must 'continuously be assessed, tested and improved'.

Reliability

Financial services can be absolutely vital to the stability of the global economy and need to be on point with the highest level of service at all times of the day. The report stated: "Some operational aspects need to be examined considering the systemic risks that failure of a critical financial system can represent."

Scalability

Any DLT solution applied to the financial industry needs to be capable of handling its services on a much larger scale than usually applied.